High Throughput Satellites: Laying the foundations for investment and financing
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This article was first published in Satellite Finance magazine, February 2014
In today's world, High Throughput Satellite (HTS) projects are attracting significant levels of interest among operators, suppliers, service providers and customers. Scarcely a month goes by without a new announcement of a further HTS programme being planned. In this article, John Worthy, Partner at international law firm Fieldfisher, examines some of the key ingredients for successful investment and financing of HTS programmes from a legal and regulatory perspective, including looking at where these programmes differ from traditional satellite development programmes.
From its first emergence as a recognised concept in around 2009, HTS has captured the imagination of many across the sector. The recent successful launch of Inmarsat's first Global Express satellite, following on other launches including Avanti, YahSat and EchoStar, along with many others in the pipeline, demonstrate the strength of the commitment which the sector is making to the HTS concept.
For many years, operators have been seeking ways to maximise efficient use of spectrum. HTS offers the capability to deliver many times the throughput of a traditional FSS satellite for the same amount of allocated frequency. While much of the commentary has focused on Ka band opportunities, the HTS concept is also applicable in other frequency bands, as illustrated by the Intelsat EPIC programme. The key distinguishing factor is that the satellites rely on extensive frequency reuse and multiple spot beams to increase throughput, which in turn reduces the price per bit delivered. In many respects the trend reflects the parallel developments in terrestrial broadband, both fixed line and wireless, and is designed to meet the expected surge in demand for broadband services.
The capacity of HTS programmes has increased hugely from early examples delivering 2-5Gbps to more recent launched satellites such as ViaSat1 delivering 140Gbps and future programmes expected to offer significantly more.
Against this background, many are asking how the development of HTS affects the approach to raising capital for corporate finance investments or debt financing. With around $12 billon due to be invested by 2016 in HTS capacity in excess of 1.4Tbps, the question is highly relevant.
Due diligence: a vital process
Assuming a prospective HTS operator can demonstrate the project is supported by a robust business case, debt and equity financiers will be looking to ensure that the necessary legal and regulatory structures have been put in place. This brings the focus to the due diligence which financiers will require. While attention is often focussed on the structure and terms of the financing transaction (and this is undoubtedly important to all parties), it is arguably the due diligence which can make or break the deal. If this diligence process does not demonstrate the robustness of the project (or if there are gaps which cannot readily be filled) then investors and lenders are likely at least to require additional protection (whether extra security, tighter covenants, reduced financing or increased interest rates or equity returns). Worst case, the operator may have difficulty in raising the financing required. This is especially true at a time when investors and financiers are scrutinising the merits of innovative projects ever more closely.
Spectrum: securing the orbital real estate
Looking at the key legal and regulatory areas of focus, one of the fundamental issues concerns access to spectrum. As with other satellite projects, an HTS programme depends on the strength of the spectrum rights available. Given the increasing congestion in ITU filings and the obstacles faced by operators in securing unencumbered spectrum, achieving full coordination presents growing challenges. Demonstrating how coordination will be dealt with satisfactorily will be a vital part of the due diligence review.
In addition, the upcoming ITU World Radiocommunications Conference (WRC15) is due to provide the forum for a highly significant debate, with the use of C-band spectrum by the satellite sector coming under challenge from the terrestrial wireless industry. Thus a prospective HTS operator wishing to use C-band will need to be prepared to show how these challenges can be averted or, at least, any adverse effect of the terrestrial spectrum usage can be mitigated.
Aside from the orbital spectrum, the operator will be concerned to secure the necessary landing rights. For many HTS applications, where the target footprint spans a number of jurisdictions, operators will need to develop and implement a plan for how to engage with multiple licensing administrations, recognising the local legal, political and cultural drivers affecting the regulators' processing of applications. Given the special characteristics of HTS networks and the extensive use of spot beams, this may include a programme to help the regulators to understand the benefits of the new HTS services and implications of multiple reuse of frequencies. The objective is of course to ensure, as far as possible, that all landing rights permits are progressed in an appropriate time frame, working with the local administrations.
The recent introduction by Ofcom in the UK of a regulatory framework for earth stations on mobile platforms (ESOMPs), covering terminals on ships, aircraft and trains, is an example of how a new regime can be introduced to meet a growing market need. The framework builds on analysis by the European Conference on Postal and Telecommunications Administrations (CEPT) and reflects Ofcom's conclusion that ESOMPs would be unlikely to cause interference to other services.
Some local administrations may also expect local gateways to be established for the downlink and signal distribution. Clearly some negotiation will be required in order to persuade the local regulators that gateways may not be essential in every jurisdiction within the footprint.
Integration with the terrestrial network
One of the special features of HTS will be the likely greater integration with the terrestrial network. The due diligence analysis will be impacted by whether the HTS programme uses a closed model, such as ViaSat or Tooway, or whether it is an open model, such as those adopted by Avanti, SES and Intelsat EPIC.
Where the operator uses a closed model, relying on a ground segment and a distribution network which it owns and operates itself, then it can show how the roll out, implementation and maintenance of this network will be managed successfully. Where however, as in many cases, the operator will be relying on partners to deliver and operate the terrestrial networks, the emphasis will be on showing to investors and financiers how these arrangements are effectively dovetailed through robust partnering agreements. Demonstrating how these agreements allocate the operational, technology, market, financial and regulatory risks in a satisfactory fashion will be a key part of the due diligence process.
Revenue streams
Turning to the essential area of revenue, the key implications for investment and financing will typically vary according to whether the programme is promoted by an existing operator or a new entrant. For existing operators, current revenue streams may be a valuable component in the bankability analysis since the cash flow will provide a level of comfort, at least in the early years, for debt service. At the same time, the projections for the HTS service will need to address how this new service will impact on existing revenue streams and the customer agreements which support them. Where this may lead to a potential reduction in the existing revenues, the issue will be how far this is simply a reflection of the changing market expectations or how far this could in reality amount to the cannibalisation of existing revenues. Equally importantly, where existing customers are expected to be moved to the new HTS service, careful analysis will be required on how the customer contracts provide for this transition.
Bankable contracts and governance
One of the key parts of the due diligence analysis will be the extent to which the core satellite procurement contracts are bankable. Negotiating the satellite procurement, launch services agreements and the insurance policies will of course need to be guided by the commercial dynamics of the operator's requirements and the counterparties' expectations. At the same time the expectations of the investors and financiers will need to be factored in, so as to ensure that these documents do not present major obstacles when presented as part of the due diligence package. Key requirements may include issues such as assignability for financing, requirements for direct agreements with financiers and effective step-in rights where appropriate.
Similarly, the corporate governance of the HTS operator may be a significant factor. Clarity on the rights of the respective shareholders (and any incoming investors), especially in a joint venture, and the balance between the equity shareholders and debt financiers should be addressed as early as possible in order to avoid potential difficulties in later negotiations. This will be equally important for an early stage operator as for an established operator or service provider who wishes to use a special purpose vehicle for the purposes of the HTS programme.
Conclusion
While many investors and financiers familiar with sector are increasingly comfortable with the risk profile presented by HTS programmes, each programme will be considered on its merits. Hence, the need for preparation for the due diligence is as significant as ever. In some cases, being effectively prepared for this process can mean the difference between a successful investment or financing within reasonable time frames and a long drawn out or, worse, unsuccessful transaction. Thus, being prepared will always pay dividends.
John Worthy presented a version of this paper at the Global VSAT Forum (GVF) HTS Roundtable 2013: The Game Changer in Action. John won the Dealmaker of the Year 2013 award from Finance Monthly.